On 29th November 2022, UAE’s FTA (Federal Tax Authority) issued a public clarification (VATP032) regarding gold and diamonds. This amendment addressed the tax treatment of making services in the jewelry industry (specifically for gold and diamonds), rendering the earlier public clarification VATP029 invalid.
The revised public clarification will define how VAT (Value Added Tax) will apply to making charges for gold and diamond jewelry. Also, the clarification is in line with Cabinet decision No. 25 of 2018 regarding the mechanism to administer VAT on gold and diamonds between registrants in the estate (Cabinet Decision No. 25).
Detailed Analysis of VAT Publication (VATP032) On Gold and Diamonds
A temporary change in definition (from 1.06.2018 to 31.12.2022) would permit the application of the reverse charge mechanism on the making charges related to gold supply. However, the definition change will be subject to conditions, as specified in Cabinet Decision No. 25 of 2018, for that specific period only.
VATP029 (from 1/6/2018 to 31/12/2022) will apply in cases where the main ingredients in jewelry are gold, diamonds, and other products. It may include making services associated with the supply of these goods. Furthermore, VATP032 will be enforceable from 1/1/2023 onwards, and it will apply to gold, diamonds, and products with a significant amount of the aforementioned components.
1) Single Composite Supply:
When a supplier’s invoice mentions a single price, including the making charges, the transaction will be treated as a composite supply. However, the transaction must fulfill the following requirements:
- The supply must have a central component (gold) and secondary elements like related services (including the making services from 1st January 2023), or interlinked components that constitute a single, inseparable supply.
- The last price of gold and secondary services must be consolidated.
- The supplier providing the gold and related services/products must be the same entity.
2) Compliance Requirements:
- If the transaction meets the above conditions, the gold supply (including the secondary services) will be treated as a composite supply. Furthermore, the transaction may qualify for a reverse charge mechanism if it meets the criteria as specified in Cabinet Decision No. 25.
- Understand that the supplier and buyer must possess adequate supporting evidence of the transaction, especially the buyer. The buyer must have a supplier-issued tax invoice with details of the single consideration for the gold product (inclusive of the related services), explicitly stating that the reverse charge mechanism applies in that transaction.
Transaction Types and Application of VAT Laws Under Those Circumstances
When the value of gold and making charges are shown separately in the tax invoice.
The value of gold and making charges are not treated as composite supplies (if it fails to meet the conditions of composite supply as mentioned in the above section).
Under the old VAT publication clarification (VATP029), the reverse charge mechanism is applicable in both scenarios above. However, the recipient must pay VAT on the reverse charge. With regards to making charges, the supplier must charge 5% VAT on making charges while adhering to forward charges.
Will things change under the new VAT publication clarification (VATP032)? Yes, under the new VAT publication clarification, the reverse charge mechanism will apply to gold and making charges (until 1/06/2018 to 31/12/2022). This VAT publication will apply to both transactions above.
However, things will change from 1/01/2023. Starting 1/01/2023, the reverse charge mechanism will apply to gold, and the supplier must levy 5% VAT on making charges. Again, this VAT publication clarification will apply to both transactions.
For composite supplies, a reverse charge mechanism will apply to gold and making charges (for VATP029 and VATP032).
Impact of VAT Publication Clarification on VAT Returns (with Hypothetical Scenarios)
Example No. 1
If a taxable person applies the provisions of Cabinet Decision No. 25 on gold items (minus making service) between 1/06/2019 to 31/12/2022 then there is no need to adjust the previous VAT return filings.
Example No. 2
If a taxable person applies the provisions specified in Cabinet Decision No. 25 for gold items and the making charges (directly connected to gold item supply) then the impact will be as follows:
No need to adjust previous VAT return filings.
Example No. 3
If a taxable person files a voluntary disclosure according to public clarification VATP029 on gold-making charges with respect to the following scenarios for VAT and RCM (reverse charge mechanism)-
- Wanting to apply VAT on the making charges listed separately from gold items on the invoice.
- RCM has already been applied to making charges.
Under the above scenario, there is no need to adjust previous VAT return filings.
Most sellers pass on the VAT charge to the buyer. Having said that, a company/entrepreneur’s responsibility does not end there. Undoubtedly, filing, documentation, and claiming VAT refunds is difficult, but every company must fulfill these responsibilities to conduct business within the UAE. The gold and diamond market in the UAE is unique. Hence, it is not practical to apply the same VAT parameters that apply to other UAE companies.
The UAE government has thoughtfully amended the VAT that applies to gold, diamonds, and their making charges. The authorities concluded that the older public clarification VATP029 created confusion in the minds of concerned businesses while creating hurdles while filing VAT returns. With the introduction of the new amendment, VATP032 (enforceable from 1/1/2023), people will have a clearer idea of the applicable VAT on gold & diamonds including making charges.
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